Freedom of contract in PPP projects

By Akshay Jaitly、Sakya Singha Chaudhri and Nayantara Nag, Trilegal
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The recent decision of Bombay High Court in Flemingo Duty-Free Shop v Union of India raises important issues regarding the higher judiciary’s power of review over the execution of public private partnership (PPP) projects by private companies. The high court’s judgment subjects even the commercial operations of private companies which are executing government contracts to the public law duty of equality and fairness of action.

The implications of the judgment are far-reaching, given the prevailing policy of the Indian government to award large contracts for essential public utility services to private players via the PPP route.

Akshay Jaitly Partner Trilegal
Akshay Jaitly
Partner
Trilegal

The case involved Mumbai International Airport Limited (MIAL), which was awarded a concession for the development and modernization of Mumbai international airport.

As part of the modernization work, MIAL invited tenders for the setting up of a duty-free shop in the airport premises. Flemingo, one of the parties which submitted tenders, was not considered by MIAL. Flemingo challenged the tender process before Bombay High Court, alleging discrimination.

The main issue that arose for consideration was whether a private company such as MIAL, when executing a government contract which also involves rendering of public services, is required to comply with the established principles of equality and fairness that apply to public authorities when issuing tenders or awarding contracts.

Rival contentions

Flemingo contended that MIAL’s actions were amenable to judicial review for two reasons. Firstly, MIAL was discharging essential public functions of operation and management of Mumbai airport under a statutory lease from the Airports Authority of India. MIAL was therefore required to ensure compliance with the principles of equality and fairness of action as mandated under the Constitution of India.

Secondly, because the amounts paid by MIAL to the government go to the public exchequer, MIAL was obliged to ensure the widest possible participation in the tender bidding process in order to obtain the highest possible public revenue from among the bidders. Therefore, it was not proper for MIAL to exclude Flemingo.

According to MIAL, the obligation to provide a duty-free shop was not a statutory obligation or a public duty, but arose out of a contractual obligation undertaken by MIAL as part of the airport modernization. MIAL was not acting for the public benefit but for its own benefit as a commercial organization geared towards making profits.

The high court held that MIAL was discharging a public function in allotting a duty-free shop, and was therefore required to ensure equal opportunity for participation to all bidders, in line with the public law duty of fairness and transparency.

Further, the high court held that the standard of the duty-free shop is critical for the overall public perception and reputation of Mumbai international airport. Therefore, MIAL was obliged to act fairly and reasonably and select an allotee by open competition in accordance with clear, well-established norms.

The high court’s judgment has been challenged in an appeal before the Supreme Court.

Analysis

MIAL is undoubtedly discharging public functions with regard to the operation, maintenance and provision of airport services. However, the obligation to provide a duty-free shop at the airport is not a statutory obligation or a public duty. It can be strongly argued that, in awarding the contract for the duty-free shop, MIAL was not discharging a public function or acting in the public interest but was rather acting for its own benefit as a commercial organization geared towards making profits.

Sakya Singha Chaudhuri Counsel Trilegal
Sakya Singha Chaudhuri
Counsel
Trilegal

Two distinct principles that have been developed by Indian courts are relevant in this context. The first principle is that any person or private body discharging public functions falls within the sphere of public law.

The second principle is that once state largesse has been awarded to a private party under a government tender, the rules of public law in relation to the award of state largesse cease to apply; instead, the relationship between the parties falls under the domain of private contract law. This line of distinction seems to have been somewhat blurred in the high court’s judgment.

The principle enunciated by Bombay High Court will have a considerable impact on the operation of the private sector in PPP projects, since the need to ensure timely completion of a project often makes it convenient to avoid the tendering process for the awarding of sub-contracts.

Given that central and state governments are increasingly favouring the grant of concessions to private parties for operating public utilities, this issue will assume significant importance for the success of PPP projects.

Akshay Jaitly is a partner at Trilegal in Delhi where Sakya Singha Chaudhuri is a counsel and Nayantara Nag is an associate. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.

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